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What makes the historical cost accounting model irrelevant?

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What makes the historical cost accounting model irrelevant and what alternative model should we look at?

Looking for a starting point, some helpful research sources maybe a short introduction.

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Solution Summary

Your tutorial is 540 words plus two references and gives you some of the classic arguments for and against historical cost, including why it is irrelevant to internal users and external users. Some counter arguments are also included. The alternative is discussed.

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Historical costs are not relevant for internal use or external use. Here's why.

Internal use

In decision making, Book value is irrelevant because you cannot change what has already happened. So, they will never differ between alternatives and so can never help to discern the best course going forward. Historical costs will always be the same for all alternatives and therefore cannot lead to one looking better than another. Since historical costs can never favor a particular decision (because it is the same for all potential decisions), it is not relevant.

The alternative for internal decisions is to use only incremental costs and incremental benefits, folding in opportunity costs, if any. These are costs that change because of a decision or are opportunities given up for a particular course of action.

External use

In financial statements, historical costs tell you what the original ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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